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Given that inappropriate government policies are already making the Iranian business communitynervous, international pressure on the economy could have a major impact on business confidence.
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While he represents a dangerous and growing element in the Iranian elite, the real power holder hasbeen the Supreme Leader (who is exactly what the title suggests), Ayatollah Ali Khamenei. For thelast 18 years, Khamenei has preferred low-level confrontation with the West -- just enough to keepthe revolutionary spirit alive, but not enough to risk open hostilities. For now, Khamenei seems tothink that the West, despite its tough rhetoric, will do nothing to stop Ahmadinezhad, so why not lethim push ahead.
Economic Vulnerability
Having pegged his reputation on his ability to help the ordinary man, Ahmadinezhad faces seriousproblems: the economy is a mess, his policies are disastrous, and Iranians’ expectations are sky-high.The World Bank’s 2003 report about Iran noted, “Despite the growth in the 1990s, GDP per capita in2000 is still 30 percent below what it was in the mid 1970s, compared with a near doubling for therest of the world.” Iranians are galled to find that their country has slipped badly behind the Arabs onthe south side of the Persian Gulf, whom they traditionally have regarded as their social inferiors.Thanks to the tens of thousands of Iranians living in Dubai, Iranians know full well that Dubai isbooming because it has embraced globalization, while their country falls ever farther behind, trappedby its suspicion of the West.Ahmadinezhad’s policy is based on producing everything at home and creating barriers to trade – hehas no use for globalization. His government has been discouraging foreign investors, for instance,refusing to allow Renault to use the billion-dollar facility it built in Iran to build an inexpensive carfor the Asian market. The recent Iranian boom has been based almost entirely on profligategovernment spending which cannot last forever. Despite the flood of oil money, government policiesare such that the IMF warns the budget will fall back into deficit again within two years even if oilprices remain sky-high.The recent massive government spending has led to several years of solid growth, yet it has barelydented the country’s long-term economic problems. While reported unemployment fell to an eight-year low of 10.3 percent last year, job creation remains insufficient to absorb the 700,000 youngpeople entering the job market each year. The IMF forecasts that even if oil prices remain at theirpresent high level, unemployment will steadily increase in years to come. In its 2003 report, theusually sober and understated World Bank summed up the “daunting unemployment challenge” withstrong words: “Unless the country moves quickly to a faster path of growth with employment,discontent and disenchantment could threaten its economic, social, and political system.”Economic and political frustration is feeding social problems. One is chronic drug problem, with theIranian government acknowledging that two million people use narcotics, mainly opium; otherestimates are higher. Divorce is on the rise; one study found that 30 percent of newlyweds gotdivorced within three years. Another is increasing prostitution; the official estimate is 300,000prostitutes. There have been a number of corruption scandals involving judges and government socialworkers involved in prostituting young girls. Instead of making reforms that would allowentrepreneurs to create jobs, the political elite is more comfortable with the “solution” of risingemigration rates, especially among the well educated. In sum, many of Iran’s best and brightest areleaving the country, and a growing number of those remaining are at risk of becoming an underclass.
Business Confidence: The Achilles’ Heel
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